Research Trends & Conclusions: Corporate Governance 2012
With the benefit of over 15 years of independent research, encompassing thousands of votes from international clients a private practitioners, and hundreds of hours of interviews, Who’s Who Legal examines the recent trends and developments in the global corporate governance law marketplace.
Boardroom activities have literally been making headlines in recent months. The “shareholder spring” has taken its toll on a range of UK companies, with the chief executives of Aviva, AstraZeneca and Trinity Mirror and stepping down within a week of each other in the face of shareholder revolt. Executive remuneration has been a lightning rod for discontent in many cases, with investors exhibiting sustained, and in many cases co-ordinated, opposition to proposed pay packages.
Calls for the regulation of corporate pay, including tying it to company performance, have grown and plans to give shareholders a binding vote on remuneration were included in the Queen’s Speech in early May. Much of this should be seen within the politicised context of the on going controversy over bankers’ bonuses, but it remains a contentious issue that often requires the expert counsel of external lawyers to negotiate safely.
However, at this stage there has been relatively little direct movement against directors, with the dissent mainly focused on pay. In the US, Dodd-Frank is still causing companies to reassess their compliance programmes while the economy is forcing them to focus on risk strategy. While elevated levels of shareholder activism continue, there were differing views on the state of the relationship between the two parties; the positive interpretation is that there is now greater engagement between companies and their shareholders, reducing the need for aggressive action, while others suggested that until institutional investors become members of nomination committees and more fully integrated at the highest level the potential for friction remains.
The continuing travails of the global economy continue to force issues of corporate governance up the agenda. Examples of companies failing in their obligations are legion, and the need for directors to focus on their responsibilities is clear and demonstrable. Risk management and general ‘corporate hygiene’ are high on everyone’s list of priorities, and minds are further concentrated by regulation such as the UK Bribery Act. This has required clients to bring in new internal systems and controls, which have in turn in turn have uncovered some issues requiring the attention of the sector’s legal experts. Taken together, this has had a knock-on effect on the demand for the sector’s leading lawyers; in the words of one, “If you are selling crisis management, people are now buying.” In turn, this edition is the largest book we have yet published in this sector, with 484 listed experts from 50 countries.
While these issues used only to be a matter for publicly listed companies, now other entities are emphasising their corporate compliance, most obviously in the financial services sector. Board composition is under greater scrutiny, as law firm clients become more conscious of the necessity of properly qualified boards and the requirements on potential directors become ever more onerous.
One nominee expressed surprise that more lawyers have not been recruited to boards, given their demonstrable knowledge in many of these areas. The traditional perception of a lack of the necessary business perspective does not always match the reality, given the number of board-related situations our featured experts find themselves in, and it may be that this is going to change in the future. The first signs are in place with a selection of general counsel already making the step up to CEO. It was also suggested that the current push to increase the number of women on boards – the EU announced in May the first step towards quota legislation in this area – may also help, as “women lawyers are one of the few groups who have the necessary experience, and law firms have been comparatively better at promoting women”.
Alongside the push for greater diversity, lawyers also expect to see a continuing focus on auditing and remuneration issues, as well as an increase in compliance work and narrative reporting. Around the world, further regulation and disclosure requirements are expected, propelled by political pressure in a reaction to recent crises: “there is a certain amount of stable doors and bolting horses”, in the words of one source. Criminal sanctions are increasingly being applied and fines are increasingly made public, often a new experience for many law firm clients “and one they’re not happy about”, with increased compliance work again the outcome.
In the course of our research, the issue of whether this incoming tide of regulation is having a strangling effect on business was once again raised. While the view varies from client to client and investor to investor, many lawyers reported feedback from clients that they spend so much time staying abreast of their compliance obligations that it is difficult to get anything else done. Time will tell if the balance is right, but for this edition, as in its immediate predecessors, the general tone of the responses was that a relaxation of requirements would be beneficial to all.
Clients repeatedly cited strong relationships with regulators as one of the qualities they look for in their counsel, and recent months have certainly been active for enforcement agencies across the world. Some expect the US-style active discussions between companies and enforcement agencies to be adopted in Europe, although others have said that they have found it harder to establish a dialogue with the UK’s Financial Services Authority, as scrutiny increases and significant organisational changes are coming into view. “The FSA is in a difficult position in advance of its breakup,” said one London lawyer. “It is planning for a New World while still enforcing the old one.” There continues to be the possibility of EU-wide enforcement activity, although that often meets national opposition and recent suggestions that the UK adopt some Scandinavian governance techniques met with widespread resistance. What remains certain is that the regulatory environment around the world will continue to demand transparency, and clients will look to their outside counsel to help provide it.
Clients were consistent in the qualities they seek from their outside counsel. The practice area is built around long-standing client relationships and individual personal relationships, and a particularly high level of experience and judgement is associated with this type of work.
Law firms are also flexible in how they structure their corporate governance practice groups. With governance considerations playing such a central part of many deals, the practice is often fully integrated into other groups including transactional, cartels and securities. Firms with long-standing large corporate clients have the experience to excel in this field, but those with strong disputes practices also have the experience of dealing with pressured situations, large amounts of information and the setting-up of systems and procedures. Many also cited the benefits of having a strong regulatory practice, as experience of working with regulators is often key.
Governance is particularly relevant when companies move jurisdictions, and firms with an international spread and the ability to advise on multiple jurisdictions are well placed in this regard, while others make use of their networks of best friends and associated firms. Clients want to know the differences between the national regulatory regimes, in order to manage expectations of their shareholders worldwide. It was suggested that, as international “best practice” is perceived to follow the UK model, firms with strong local offices are at an advantage in this respect, but in any case international compliance entails keeping on top of an enormous amount of information, and one service law firms provide is to collate it all together for clients and present it in as applicable and understandable way as possible.
Taken together, this is a difficult practice to develop, as only a few firms fulfil all the necessary criteria. Those that do are called upon to provide ongoing advice to clients, to give an external perspective to shareholders looking to make their influence felt, and to keep companies up to date with their compliance obligations. The tighter regimes in which most clients now operate have led to an increased appetite for instruction and guidance, with firms called upon to produce handbooks, workshops, simulations and procedures.
Overall, corporate governance was said to be best handled by a combination of in-house and outside counsel. In-house lawyers bring an understanding of the workings of the company and its internal procedures, while outside counterparts can provide examples and experience from elsewhere, and are often necessary to meet the threat of potential litigation. More than ever, clients are relying on the wide-ranging expertise of their trusted external counsel to navigate their way through turbulent waters.